The Impact of the Mortgage Crisis on Financial Markets
This article explores the effects of the mortgage crisis on financial markets:
Direct Impact
The stock market often experiences a decline before the mortgage market collapses. This sequence is typically driven by a gradual decrease in home values, which also leads to broader economic difficulties.
Market Instability Concerns
The mortgage crisis has fostered a climate of distrust towards the financial system and the overall economy. This lack of confidence results in further devaluation of homes, restricting homeowners’ ability to access their equity. These conditions contribute to an economic downturn and stagnant corporate growth, ultimately culminating in a sharp decline in prices.
Industry Effects
The mortgage crisis has adversely affected various stocks and industries. Numerous financial service companies either vanished or were acquired at low prices through mergers, leading to the destruction of billions of dollars in shareholder value. Additionally, firms in the housing sector have experienced significant financial losses.
Changes in Financial System Components
Several investment funds came under the supervision of the Securities and Exchange Commission, while certain financial service companies lost their capacity to engage in trading and manage their own funds. This crisis also precipitated increased regulatory scrutiny of credit rating agencies.
Types of Mortgages
Below are five primary types of mortgages:
Conventional Mortgage
These loans are not backed by the federal government and are divided into two categories: conforming and non-conforming loans. Conforming loans adhere to the guidelines set by the Federal Housing Finance Agency, while non-conforming loans do not meet these criteria.
Jumbo Mortgage
Jumbo loans exceed the limits set by the Federal Housing Finance Agency and are more prevalent in high-cost areas such as Los Angeles. These loans often require extensive documentation due to the substantial amount borrowed.
Government-Backed Mortgage
Certain government programs assist individuals in obtaining loans. In the United States, three agencies provide this support: the Federal Housing Administration, the U.S. Department of Agriculture, and the U.S. Department of Veterans Affairs.
Fixed-Rate Mortgage
This type of mortgage maintains a consistent interest rate throughout the loan term, resulting in stable monthly payments over time.
Adjustable-Rate Mortgage (ARM)
ARMs feature interest rates that fluctuate based on market conditions. A typical ARM might offer a fixed rate for the initial seven years, after which the rate may adjust every six months.
Advantages of Mortgages for Individuals
Mortgages facilitate homeownership by allowing borrowers to spread out loan repayments over several years. They represent a cost-effective borrowing method, as mortgage interest rates tend to be lower than those for other forms of credit, given that the loan is secured by the property.
Disadvantages of Mortgages for Individuals
Borrowing through a mortgage often results in repaying more than the initial borrowed amount. Additionally, individuals may find themselves in debt for extended periods and must ensure timely payments to avoid the risk of losing their home, since the mortgage is secured against their property.